Startups

The Three Stages of Funding a Startup

Without an outside source of funding most media and technology startups will perish. The cost of hiring engineers and salespeople is usually just too high to self-fund a business until it is profitable. There are usually three stages of fundraising that a startup must go through to create a sustainable business:

Stage 1: Angel Round. The first money a startup often raises is from individuals—also known as “angels.” Each angel typically invests between $25K-$100K. While taking money from friends and family is common, it’s often better if the startup can get it from people who have a profile in the industry in which the startup operates.

An angel round can range anywhere from tens of thousands to hundreds of thousands of dollars. Like all investors, angels will want to know who else is participating.

Stage 2: Seed Round. Assuming the startup has built a basic product that people seem to like, the next step is usually to raise a “seed” round of financing. Seed stage funding comes from seed firms like Lerer Ventures, Bullpen Capital and SV Angel. Their goal is to invest in startups that can make it to the next stage and be successful.

Seed firms invest more than angels but less than the larger venture firms—usually between $50K – $250K each. Seed firms will often expect that you raise more money from your existing angel investors so it’s important to have at least a couple with deep pockets.

A seed round is usually a couple hundred to a half million dollars and can consist of multiple firms.

Stage 3: Series A. The Series A raise is the hardest to achieve because it requires a venture capital firm to put at least a couple million dollars into the startup. Not only that, but a good Series A firm will keep something in reserve in the event that the startup needs more money later on.

Sadly, most startups will never live to see a successful Series A raise. In the last decade over 400 venture capital funds have either gone out of business or stopped making new investments. In 2012, only 86 funds were active. That leaves a relatively small group of VCs to lead a Series A round.

The best way to get an introduction to a potential Series A VC is though the seed firm that invested in the startup. A startup will usually need many introductions as most potential Series A firms will decline to invest.

However, if everything goes right, after three stages of investment over the course of 12-24 months a startup will have raised upwards of $5 million. Ideally, this will provide the company with the runway it needs to become profitable or be acquired. Some startups will keep going and continue to raise additional rounds–Series B, C, or even D—until the company is either acquired, goes public or fades away.

When the fundraising process is done right, each stage builds upon itself and the result is a profitable outcome for everyone involved.